“Last Try” in Greece Before Capital Controls: Then What? Best Case Scenario for Greece

For years we have heard phrases like down to the last hour, one minute before midnight, now or never, etc. But on every previous occasion, the Troika negotiators pulled an agreement rabbit out of the hat.

Talks between Athens and its international bailout creditors were expected to resume late on Sunday after Greek government officials were told to submit a final list of economic reforms in order to secure €7.2bn in desperately needed rescue aid.

A spokesman for Mr Juncker would only say that talks would continue on Sunday. But others briefed on the talks said the meeting had been “difficult” and that senior eurozone officials were concerned whether a deal could be reached in time for Greece to access the aid before its bailout expires at the end of the month.

“Positions are still far apart,” said one EU diplomat. “It’s not certain there will be an outcome.” Another senior eurozone official said the Greek team returned to Brussels on Saturday without new proposals and that Sunday’s evening session would be a “last try.”

“Greek movement [is] not discernible,” said the official. “I think they do not want a solution.”

Mr Pappas, the Greek minister of state and a longtime political ally of Mr Tsipras’, took to Twitter to push for politicians to become engaged in the negotiations rather than technocrats who normally hammer out such agreements. “A political solution is needed to permanently exit from the crisis,” Mr Pappas wrote.

“A credible proposal needs to be tabled by the Greeks in the next 24 or so hours,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “Otherwise it’s looking like game over for Athens.”

Under the creditors’ plan, Athens would need to find measures to hit a primary budget surplus — revenues less expenses when interest on sovereign debt is not counted — of 1 per cent of gross domestic product this year, rising to 2 per cent next year and 3 per cent in 2017. By 2018, the primary surplus would need to hit 3.5 per cent.

“1.2 per cent was utterly feasible in late March,” Yanis Varoufakis, the Greek finance minister, wrote on Twitter over the weekend of this year’s target. “1 per cent infeasible after three more months of induced asphyxiation.”

Primary Surplus Infeasible?

The creditors targets for a primary surplus are not infeasible, but they would amount to “induced asphyxiation”.

And for what?

Every bit of that surplus would go to pay creditors. If Greece could get a primary surplus, it’s best strategy is simply to default, and use that surplus for internal use rather than to pay back absurd “bailout” loans that should never have been granted in the first place.

Grexit might have cost perhaps €30 to €60 billion euros up front had the nannycrats just let Greece go when the problems first arose years ago. Two bailouts and growing Target2 imbalances ever since have turned this into a €330 billion problem, minimum.

Just a few months ago, the possibility that capital controls would be imposed in Greece still seemed distant.

But with the government fast running out of money — and nervous depositors pulling cash from the country’s banks — talk of such extraordinary measures is widespread and analysts are warning Athens may soon be forced to employ them

“We are four to six weeks away from the possible imposition of capital controls,” said Daniel Gros, director of the Centre for European Policy Studies think-tank in Brussels. “There is always some temporary solution [eurozone politicians] can pull out of thin air, but now we are getting really close.”

Four to Six Weeks Away?

Four weeks is a long time. Is it a minute before midnight or not?

This is what happened in Cyprus, and it happened in a take-it-or-leave-it offer in a matter of hours, not weeks.

Under pressure from its EU partners, Nicosia [capital of Cyprus] agreed to a deep restructuring of its banking sector and a “bail-in” of large depositors — forcing them to accept bank shares for some of their cash — in exchange for a €10bn loan.

The measures took a heavy toll on ordinary citizens: under government orders, Cypriot banks were closed for nearly two weeks. When they reopened, there were tough restrictions on domestic and external payments, including a domestic cash withdrawal limit of €300 per day, a €5,000 limit on credit card payments abroad, and a requirement of central bank permission for any transfer of more than €5,000.

But the measures were ultimately credited with preventing a full-fledged meltdown of Cyprus’ banks and therefore helping to keep the country in the eurozone.

Bank Meltdown

Nonsense. There was a bank meltdown and capital controls are proof of it.

To bail out the banks and the bondholders, depositors suffered massively, all for a €10 billion loan that still has to be paid back.

How would Greek capital controls be implemented and what form might they take?

It’s likely that such controls would need to be brought in over the course of a weekend, though I expect they may also need to be combined with some bank holidays anyway.

Cash/ATM withdrawal limits: This would be a vital control in order to halt the huge outflow of deposits which has been taking place and which will pick up if a deal isn’t struck soon. In Cyprus the limit was set at €300 per person per day. However, I suspect ones in Greece may go even lower. This is because Greece is suffering from serious domestic withdrawals while the primary concern in Cyprus was foreign outflows.

Foreign transfer controls: The aim here would be to limit the amount that people can transfer abroad from Greece in one go and also over a set period. Obviously some transfers are needed for businesses to function so there would need to be a process by which businesses related (and other verified) transactions could still go through.

Time requirements or taxes: Other options or versions of the above include taxing certain withdrawals or foreign transactions heavily. This has the advantage of potentially creating a revenue stream for the government, though it may come at a very high cost. The government could also decree time limits on certain deposits or investments in an attempt to limit withdrawals indirectly.

Physical controls: Obviously with free movement within the EU it would be quite easy for people to move large amounts of cash or assets across borders. As such there will need to be checks and limits on the amount of cash people can take abroad with them. This may also have to extend to assets. For example, someone could purchase a car and then try and drive across a border and sell it on. This is tricky to police but some attempts may well be made.

What’s the Aim Capital Controls?

The more interesting discussion is the “What’s the Aim?” question. I generally agree with the Open Europe writer Raoul Ruparel on this one.

Why would Greece go for capital controls?

This seems an obvious answer given all of the above – to halt bank runs and stop money flowing out of the economy. But there is a wider question that needs to be answered. What would be the aim and end goal of capital controls? Ultimately, capital controls are only really of use when it comes to buying to time or pushing through some tough policies. In Cyprus and Iceland the controls were needed to impose tough write downs on foreign depositors/investors but stop huge outflows of money. But the actual write down was over fairly quickly. But in Greece the problem is a long term malaise and huge uncertainty over its future position in the Eurozone – not a singular one off event for which time needs to be bought.

In the end then, I find it hard to see why the Greek government would want to go for capital controls. They would only be of use if we got to the stage where a deal was close but couldn’t be struck in time. But if we get to that it will be because the differences between Greece and its creditors could not be solved over the past 6 months. It’s not clear that a few extra days, weeks or months under capital controls would drive an agreement. It’s also not clear why the government would want to put the economy and people through the pain of such controls to then just agree a deal. Why not just agree one now? Surely, it doesn’t seem likely that Greece’s negotiating hand would be stronger under such controls?

So, while capital controls are technically possible, I have failed to see any clear answer as to why they would actually desirable, especially from the Greek perspective.

That is why I believe that capital controls would most likely be a prelude to a Grexit. At least here they would serve a clear purpose – allowing time for the transition to a new currency to be organised and negotiated. They would likely need to be even more stringent and probably involve longer term bank holidays. Therefore, when capital controls start to become seriously discussed, it is probably quite a negative sign.

Aim of Dragging Out the Talks

My disagreement is the last sentence. I find it hard to believe capital controls are not already seriously discussed – by four groups: Greece, Germany, IMF, ECB.

Greece and the ECB are the important ones. If the ECB shuts off Emergency Liquidity Assistance (ELA), Greeks will not be able to withdraw cash.

I propose it’s likely that Greek Prime Minister Tspiras purposely dragged out the talks for the express reason of giving people time and reason to withdraw cash. While the negotiations were underway, all to no avail, Greeks pulled money.

Unless there is a disorderly mad dash for the exit, the ECB may allow this to continue. We will find out soon enough tonight. But at some point (and I expect far sooner than four weeks from now), Greece will be forced to impose them as soon as ELA is shut down.

Bottom line: If you still have money in Greek banks, you are begging for a haircut.

By the way, capital controls are in violation of EU rules. Then again, what nannycrats cares about rules?

The interim agreement from Russia requires Greece to initiate some market reforms that will pay big dividends down the road.

Greece reforms and does very well in a relatively short time frame.

Italy, Spain, Portugal, get some clever thoughts of their own.

Default the Best Option

Whether or not Greece chooses to quickly get to a primary account surplus position so that it can stay in the eurozone, it’s best option is to default.

And if it defaults, capital controls will come as soon as the ECB shuts off ELA (if not before). That discussion has to be going on at the ECB right now.

Meanwhile every day that passes by without capital controls is another day Greek citizens have to get their money out of the banks.

Why there has not been a mad dash for the exit instead of a slow bleed of cash remains a mystery.

Finally, the real fear of the nannycrats has to be that the best case scenario for Greece does indeed happen, proving what any sensible person knew all along: Exit is possible, and there is life after the eurozone.